Wednesday, November 9, 2016

Inheritances reduce wealth inequality

I note as an aside that Sweden, in the field of socioeconomics, seems to be taking a similar role as that of Iceland in genetics. Iceland has a small population (300,000 or so) with reasonably well documented family genealogies of several generations length, and a national medical health care system which makes it much easier to link genetic cause to health outcome than in virtually any other population. For these reasons, Icelanders have been the source of much research.

This study estimates the effect of inheriting wealth on inequality and mobility in the wealth distribution. Using new population-wide register data on inheritances in Sweden, we find that inheritances reduce inequality and increase mobility among heirs. Richer heirs indeed inherit larger amounts, but less affluent heirs receive substantially larger inheritances relative to their pre-inheritance wealth than do richer heirs. The Swedish inheritance tax had a small overall impact but appears to have mitigated the equalizing effect of inheritances. We also investigate the potentially confounding role of pre-inheritance gifts and behavioral responses to expectations about future inheritances, but neither of them change the main finding that inheritances reduce wealth inequality.

If true, and if true in countries other than Sweden, this is a quite interesting caution agaiinst following logical assumptions without checking against actual demonstrated facts. It is logical to assume that inheritances would increase income inequality in a population. It makes so much sense. And if it were the case, then that in turn provides an excellent rationale for increasing inheritance taxes. High inheritance taxes could be assumed to reduce inequality, an emotionally appealing idea.

But emotions should be held in check by evidence. The Swedish evidence suggests that if income inequality is your main concern, then removing inheritance taxes is a good public policy approach.

There is a jaundiced view that inheritance taxes are actually a scheme by the established elite to bar the middle class from entering the elite class and that reducing inequality was never the objective in the first place. The argument is that the established elite are in a position, having sponsored the policies in the first place, to find the loopholes to protect their favored status while the actual burden falls most heavily on the middle class. Under this scenario, you keep out the hoi polloi and raise money on someone else's labor at the same time. A win-win for the the vested interests.

Regardless for the original justification, the actual data from Sweden suggests that high death taxes do not facilitate reduced income inequality.